Ruminations of an Israeli-American Venture Capitalist Looking for the Best and Brightest Entrepreneurs

Saturday, April 25, 2009

A Preferable Route to Market

With IT budgets frozen or shrinking, and most of what is left going to only the very largest vendors, software starts ups find themselves in a real quandary. However, a little observed trend in software usage and purchasing over the past few years has steadily opened a new set of doors to businesses accounts, effectively bypassing the punishing decision making processes of the IT department. Purchasing power within these organizations has become distributed and democratized, as more and more employees acquire the necessary Internet proficiency, management authority and expense account to purchase software and services online. These employees do not necessarily work in IT and may have a very limited budget, yet they are empowered to make such software purchases for themselves or their department, because Internet purchases have become as mundane as paying for a dinner with a client or ordering a plane ticket. Smart start-ups are building strategies to capitalize on this fascinating trend, and many have already become market leaders in their respective market segments.

Many of the effective marketing and sales strategies actually emulate those found in pure play consumer Internet and software companies, and often incorporate consumer-like simplicity in the product design itself. The reason is that these new buyers in the enterprise are using their consumer technology intuition to identify utility and productivity solutions on their own through downloading software or subscribing to new web-based services. From what I can see, this new breed of software companies has employed one of, or a combination of, two strategies:

1) Consumer as a Conduit – Simply put, this strategy starts with the consumer, but designs the product with an aim of ultimately transmitting it to the enterprise to build a business. It works by casting a wide enough net in the consumer community, and relying on a certain percentage of consumers to infuse their employers’ organizations with the product. This may start with small businesses, but there are plenty of examples of large businesses adopting software through this chain of events.

This strategy is often predicated on launching a free or low cost consumer version, and exacting a charge when businesses use the otherwise free consumer software. In some ways, this business model is reminiscent of shareware, and is often termed “freemium”(although many “freemium” products have limited appeal to the typical business organization). This strategy has proven successful because consumers have shown a remarkable capacity to embrace innovation, far outpacing that of businesses. For this to work properly, a product must clearly address both consumer and business needs in full.

Some examples:

- Mozy, now a part of Decho(an EMC company), offers consumers a dead-simple, free back-up solution. The company’s rapidly growing consumer base brought the product’s premium version in the office environment and even to the enterprise. (see also Carbonite)

- Teamviewer is a remote desktop software download that is exceedingly simple to use. Consumers downloaded it 15m times for fre, and fair amount of them then brought it into their places of work allowing the company to build a sizable business. (see also GoToMyPC and DimDim)

- YouSendIt offers a web-based service for distributing large files (essentially FTP replacement). Embraced by 10m consumers, the familiarity and simplicity of the product pushed it into the enterprise, where they have thousands of paying customers. (see also Box.net and Dropbox)

- Wix is a website builder/hosting service funded by BVP. The product is provided free to consumers with Wix branding, but at a monthly fee for small business users. Despite the product depth and differentiation, Wix chose to forgo the option of charging consumer preferring to build subscription model using consumers as the conduit.

2) Targeting the Expense Account – This strategy uses Internet marketing to directly reach the desired customer within the enterprise. These individuals don’t really have any IT budget(at a minimum they are reimbursed for business expenses), but are able to make small online purchases that can lead to widespread adoption in the enterprise over time. The employees may be a low level IT employee, sales rep, project manager, systems analyst or marketing analyst. They also may be engineers looking for solutions to improve their productivity, which explains why open source software can develop traction very quickly. These individual employees have something in common in that they don’t get the attention they need from their IT organization due to their limited influence and supposed narrow use cases. Nevertheless, they are always interested in using new products and to improve their performance or simplify their work processes. As a result, they speak to peers at other firms, and scour the Internet for products they can quickly trial, buy and use.

Some examples:

- Early on Salesforce.com was able to gain initial penetration into organizations by selling to the individual sales rep, not the SVP Sales, CIO or CFO. Not too dissimilar, individual sales reps were early adopters of WebEx.

- Spiceworks has a software download that helps technology professionals manage, track and report on the software and hardware on their company’s network. Interestingly, their strategy has been to give the software away for free and develop a revenue model using lead generation for IT products.

- A former Adobe exec recently told me that while it was not their intention, the biggest purchasers of their Acrobat software comes from individual employees, who come into account with the free Reader product elsewhere in the Internet.

There are many more examples, of successful software company’s reaching their target customer via Internet marketing and sales including LogMeIn, Solarwinds, Altassian and Acronis. Nevertheless, it is clear that all of the above examples have several common attributes, including:

1) Simplicity in terms of sign-up, installation and basic usage2) Low entry cost (perhaps via monthly subscription model) or no entry cost (“freemium” model)3) Low cost of goods, to ensure consumer exposure to the product via a free variant of the product (COGS may include bandwidth, storage and serving costs)4) Low-touch product support5) Easily marketed and sold over the Internet

The last of these deserves a separate post, because direct online marketing and sales requires a strong understanding of the market size, buyer, and of course unit economics.

The model doesn’t work for everyone, but a lot of software companies I meet can adopt these strategies with only some incremental work to the product. Longer-term, these companies will have a far more scalable and profitable sales model than traditional enterprise software companies hiring sales reps, signing channels, or working with OEMs.

As I have mentioned in a previous post, Israeli companies should be jumping on these low-touch, no travel, limited-interaction sales models. The challenge however, is to develop your product to support the business model, something many Israeli companies often do backwards.

There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment?s pleasure, for the rest of their lives.https://findgaragedooropener.com/

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The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”). The material here is written on the author’s own time for [his/her] own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.